Multi-level marketing brands may be a quick way to make a buck for some people, but for others it may spell financial ruin.
On Monday, October 23rd, former distributors for multi-level marketing legging and athleisure brand LuLaRoe are filing suit against the company. These distributors, called “Retailers” by LuLaRoe, accuse the company of being a pyramid scheme, as defined by California law.
The 1 billion dollar suit federal class action suit, filed by three plaintiffs, seeks damages for incurring at least $20,000 dollars of debt upon its sales consultants. 80,000 of those consultants paid up front for their inventory. LuLaRoe denies all charges.
“We have not been served with the recent complaints, but from what we have seen in media reports, the allegations are baseless, factually inaccurate and misinformed,” a statement made by the company said, “We will vigorously defend against them and are confident we will prevail.”
In the brief attached to the filing, former retailers claimed that they were strongly encouraged to keep up to “$20,000 worth of inventory on hand” including “10 items in every size and style.”
The process of having new retailers consistently on the bottom of the company’s hierarchy, unable to reach higher levels and turn a profit is why the suit claims LuLaRoe’s status as a pyramid scheme.
Investigations into lawsuits of this sort are examined by the Federal Trade Commission (FTC). In a ruling in early last year, the FTC awarded damages of $200 million dollars to distributors participating in vitamin and supplement company Herbalife’s multi-level marketing business deals.
Essentially, the settlement for the 2016 Herbalife suit stated that there were two key standards for a multi-level marketing company that wants the all clear from the FTC.
First, consultants must get incentives from selling product to consumers, not just recruiting more sellers. Second, a multi-level marketer has to tell the truth about the return on investment that a consultant can receive selling the product.
According to the suit against LuLaRoe, the suit stated that one someone decided to become a consultant, “they were pressured to invest and reinvest by purchasing the Defendants’’ clothing products — regardless of whether they were able to sell the inventory.”
LuLaRoe also claimed that individual sellers could “earn full-time pay for part time work.”
In light of the suit, LuLaRoe’s website, which has subsections for “happiness,” “social responsibility,” and “making good” seems a little ironic now.